How the U.S. shale boom is putting pressure on Alberta’s light oil

CALGARY – The U.S. shale boom is poised to cut demand for Alberta’s light oil, amid mounting fears of a glut and calls from energy companies to ease restrictions on exporting crude from U.S. shores.

Steady production gains from the U.S. Bakken and the Eagle Ford shale play in Texas could overwhelm U.S. refineries by mid-2016 and drive down prices unless legislators in Washington ease restrictions on exports, analysts at RBC Capital Markets said in a report Wednesday. Save for shipments to Canada, the U.S. prohibits exports of crude oil under a ban that dates to the 1970s.

“You’re going to come to a wall at some point where there’s too much oil and nowhere to put it in the U.S. without oil exports being allowed,” said Leo Mariani, senior U.S. analyst with RBC in Austin, Tex.

“At that point we certainly would suspect that if we don’t have exports then you’re going to start to see pretty dramatic oil-on-oil competition, where guys are trying to compete for sales with the same refiners and end users.”

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Whether the U.S. allows exports could have significant ramifications for Alberta. Deep discounts on Western Canada Select, the key heavy oil marker, have narrowed substantially against the West Texas intermediate benchmark from a year ago.

But light oil is under increasing pressure. Edmonton Par, a light oil blend, plunged more than US$20 below WTI in December, according to Scotiabank.

Prices have snapped back, “but I think that there is a risk because of the huge and quite remarkable development of light, tight oil,” said Patricia Mohr, vice-president and commodity markets specialist at the bank in Toronto.

Canadian Oil Sands Ltd., which owns the largest share of the Syncrude Canada Ltd. project, said Jan. 30 sales of its synthetic crude oil sold for $10.84 under WTI in the fourth quarter. The oil fetched a $2.52 premium in the same period a year ago.

There is a risk because of the huge and quite remarkable development of light, tight oil

The company warned investors that rising U.S. production could push sales to more distant refineries, leading to higher transportation costs. Volatile prices “will persist for several years until additional pipeline or other delivery capacity is available to deliver crude oil from Western Canada” to new markets, the company told investors.

The prospect of a U.S. oil glut “is a risk and the key reason why Suncor and Total decided not to go ahead with another upgrader in Alberta,” Ms. Mohr said. The hugely expensive plants convert raw bitumen into refinery-ready oil.

The two companies last year scrapped plans to build the $11.6-billion Voyageur mega-plant, fearing the project wouldn’t be competitive with lower-cost shale oil.

“That’s starting very much to play out as we expected,” Suncor chief executive Steve Williams said this week. “What we’re seeing now is the Voyageur-type investment, it’s very difficult to justify doing that.”

RBC estimates the U.S. can accommodate another two million barrels a day of production growth before testing refinery and storage limits. Output could slow without exports if WTI prices drop below US$80, Mr. Mariani said.

“We don’t foresee the same problem happening for heavy oil,” he added. “The real issue in the U.S. is light oil.”

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